The government was accused of using "fantasy economics" to justify the expansion of Heathrow airport this morning, as a row erupted over the true financial benefits of a third runway.

Critics argued that the economic case for expanding Britain's largest airport underestimates the environmental cost of adding a maximum of 220,000 flights a year at the west London site. The government's economic argument for expansion centres on a total net financial benefit of £5.5bn to the UK economy. But an economic thinktank slammed the alleged financial windfall, saying it used an excessively low estimate for the cost of the carbon dioxide emitted by the enlarged airport.

The Department for Transport (DfT) said that construction of a third runway would generate an additional 210m tonnes of carbon dioxide over the 70 years to 2080, which it priced at £2.8bn – the equivalent of £13.33 a tonne. A further cost of £2.5bn would be generated by non-C02 emissions, the DfT said today. Despite these costs, it said the net economic benefit over 70 years would be £5.5bn.

However, the New Economics Foundation said that this estimate did not reflect the fact that aviation emissions can be up to five times more damaging than CO2 emitted at ground level. The thinktank put the carbon cost, conservatively, at £70 a tonne - a level which is at the mid-range of government estimates on the social cost of carbon emissions on any development.

On an NEF calculation of £70 a tonne, the total emissions cost of climate impacts would rise to between £8bn and £20bn, over 70 years, and wipe out any economic benefits.

"You are talking about a highly carbon-intensive piece of infrastructure that might be finished at exactly the moment when global oil production is collapsing and its price is rocketing. The government's case is based on fantasy economics," said Andrew Simms, policy director at the thinktank, and head of its climate change programme.

According to a Dft document that underpined the Heathrow consultation, called UK Air Passenger Demand and CO2 forecasts, aviation will account for up to 29% of UK carbon dioxide emissions by 2050 if all other industries meet C02 reduction targets - implying that Heathrow alone will be one of the most expensive pieces of infrastructure in Britain in environmental terms.

The International Energy Agency predicted that global oil production would peak much earlier than expected in 2020 – the year that a third runway was scheduled to open. The airline industry growth projections used by the government are predicated on an oil price of between $53and $64 a barrel, which would help keep down ticket prices and boost air travel from 228 million people per year, to 465 million by 2030, according to the DfT.

"The oil price estimates are crazy numbers," said Simms. "By 2030, oil below $200 per barrel is going to be hopeful." Oil represents around a third of an airline's cost base and, when it reached a peak of $147 a barrel this summer, it drove most major airlines into loss-making positions while triggering the bankruptcy of more than 30 carriers worldwide.

Willie Walsh, chief executive of Heathrow's biggest customer, British Airways, told the Guardian in May that a high oil price would lead to rising fares across the industry, and would pose a serious threat to the ultra-cheap tickets sold by budget airlines, the fastest growing sector in the industry.

The government's economic case for expanding Heathrow argues that total economic benefits from a third runway will be £19.2bn in so-called "transport user benefits" such as lower fares and more freight traffic. The total includes an estimated £3bn boost in air passenger duty, whose inclusion has been criticised by the Conservative party, which argues that a tax transfers money from the private to the public sector but does not technically generate extra economic benefits.

A city commentator argued that the root of the business community's need for a third runway, to reduce delays at the world's busiest international airport, could be assuaged by cheaper means such as retiring take-off and landing slots as they become available.

"There could be a deal to be done that retires unprofitable routes and takes slots out of service. This would mean less traffic on the runway and that ought to promote reliability," said Douglas McNeill, an analyst at Blue Oar Securities. According to the DfT, reduced delays at Heathrow would generate financial benefits of at least £1.6bn to airlines and passengers. "If you are talking about spending £8bn but getting the most bang for your buck, in the short time scale there are alternatives that could be nothing like £8bn in cost. They also don't carry as much risk," he added.

Even backers of the third runway have argued that, in the short term, there are measures that can be taken to reduce delays and maintain competitiveness. Echoing the comments of McNeill, the London First business group has argued for a reduction in take-off slots at Heathrow.

The introduction of mixed-mode, a scheduling change that allows the existing runways to be used for take-offs and landings throughout the day, would have reduced delays without resulting in an increase in the 1,300 flights per day at the airport. However, Hoon surprised residents and airlines yesterday by blocking plans for mixed-mode after he was won over by arguments that it would have caused an intolerable increase in noise pollution.

Heathrow is one of the biggest single employers in London and the DfT argues that the number of indirect jobs created by the expansion will rise from 102,000 to 117,000, with thousands more construction jobs created by the building of the project. Heathrow alone employs around 63,000 people directly, but that number would fall to around 52,000 under a third runway due to "increased efficiency", the DfT admits.

The government has not included the economic boost from the indirect jobs in its calculation of economic benefits. CE Delft, an environmental consultancy, criticised warnings that failure to expand Heathrow would lead inevitably to wholesale job losses - caused by the atrophying of passenger demand. In a report commissioned by runway opponents, it argued: "If the aviation sector were to offer less employment, people would find jobs in other sectors, albeit at possibly slightly lower wages. Similarly, if consumers were unable to spend money on aviation, they would spend it in another sector."